Cost Volume Profit Analysis Complete Test Bank Ch.10

Testbank

to accompany

Accounting: business reporting for decision making

7th edition

by

Birt et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2020

Chapter 10: Cost–volume–profit analysis

Learning objectives

1. Define fixed, variable and mixed costs

Q1, Q2, Q3, Q4, Q5, Q6, Q7, Q8, Q51, Q52, Q53

2. Prepare a break-even analysis for single-product and multi-product entities

Q9, Q10, Q11, Q12, Q13, Q14, Q15, Q16, Q17, Q18, Q19, Q20, Q21, Q22, Q23, Q24, Q25, Q26, Q54, Q55, Q56, Q57

3. Apply the contribution margin ratio to CVP calculations

Q27, Q28, Q29, Q58, Q59

4. Explain the key assumptions underlying CVP analysis

Q30, Q31, Q60

5. Discuss the uses of break-even data

Q32, Q33

6. Outline the concept of operating leverage

Q34, Q35, Q61

7. Assess the profitability of output when there are resource limitations

Q36, Q37, Q38, Q39, Q62

8. Assess relevant information for decision making

Q40, Q41

9. Analyse an outsourcing decision

Q42, Q43, Q63, Q64, Q65

10. Analyse a special order decision

Q44, Q45, Q46, Q47, Q48, Q49, Q50

Multiple-choice questions

1. Which type of cost changes with the level of activity?

a. Total cost

b. Mixed cost

c. Fixed cost

d. Variable cost

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. How is a fixed cost defined?

a. A cost that stays the same irrespective of changes in the level of activity.

b. A cost that changes with changes in the level of activity.

c. A cost that stays the same per unit as the number of units changes.

d. A cost that is a fixed proportion of profit.

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. Which of these is not a fixed cost?

a. Depreciation on motor vehicles

b. Direct labour

c. Management salaries

d. Lease payments

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. Which of the following is normally a mixed cost?

a. Motor vehicle running costs

b. Electricity costs

c. Telephone costs

d. All of the above options are examples of mixed costs

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. Which statement best describes the relevant range?

a. The relevant range is the level of activity where an entity will operate.

b. The relevant range is the level of activity where all costs can be predicted accurately.

c. The relevant range is the level of activity where cost behaviour is assumed to be valid.

d. The relevant range is the physical area where an entity plans to conduct its business.

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. What will happen if an entity increases its level of activity?

a. All costs will remain the same

b. Most costs will rise

c. All costs will vary

d. Some costs will vary; others will remain the same

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. How will variable cost be affected if production increases by 20%?

a. It will increase by more than 20%

b. It will decrease by 20%

c. It will increase by 20%

d. It will remain the same

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. If the activity level goes outside the relevant range:

a. fixed costs will always decrease.

b. fixed costs can no longer be assumed to be fixed.

c. fixed costs will remain constant.

d. fixed costs will always increase.

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. Contribution margin equals revenue less:

a. cost of sales.

b. fixed costs.

c. mixed costs.

d. variable costs.

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Selling price is $25 per unit and variable costs are $16 per unit. Calculate the contribution margin per unit.

a. $9.00

b. $1.56

c. $11.00

d. $41.00

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Where is the break-even point in a cost–volume–profit graph?

a. Where the total revenue line is below the total cost line

b. Where the total revenue line crosses the variable cost line

c. Where the total revenue line crosses the total cost line

d. Where the total revenue line crosses the fixed cost line

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. King Ltd’s contribution margin per unit is $2 and the break-even number of units is 2000. If King Ltd sells 5000 units, what will their profit?

a. $2000

b. $4000

c. $6000

d. $10 000

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Warmth Ltd’s selling price is $8 per unit, its variable costs are $3 per unit and its fixed costs are $300 000. What is Warmth Ltd’s break-even number of sales units?

a. 25 000 units

b. 60 000 units

c. 37 500 units

d. 100 000 units

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Device Nation Pty’s fixed costs are $200 000 and variable costs are 60% of the selling price. What is Device Nation Pty’s break-even point in sales dollars?

a. $200 000

b. $333 333

c. $500 000

d. $800 000

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Which of the following cannot be used to determine a break-even point?

a. Contribution margin calculation

b. Mathematical equation

c. Graphical representation of CVP analysis

d. Regression analysis

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. The break-even point would not be affected by changes to:

a. total fixed costs.

b. sales price per unit.

c. variable cost per unit.

d. number of units sold.

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. The break-even number of units equals fixed costs divided by:

a. selling price per unit.

b. contribution margin per unit.

c. total contribution margin.

d. variable cost per unit.

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Which of the following statements regarding the margin of safety is correct?

a. The margin of safety indicates the number of sales units that can be lost before the break-even units are reached.

b. If small, the margin of safety may require managers to focus on reducing costs to avoid potential loss.

c. The margin of safety indicates the amount of revenue in excess of the break-even point.

d. All of the options listed are correct.

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Using the information below, calculate the weighted average contribution margin.

a. $36

b. $42

c. $32

d. $48

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. From the information below, calculate the break-even number of units for each product.

a. X: 7500; Y: 3750; Z: 3750

b. X: 1875; Y: 1875; Z: 3750

c. X: 3750; Y: 1875; Z: 1875

d. X: 3750; Y: 3750; Z: 7500

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. The break-even point is where:

a. total sales = fixed costs plus profit.

b. total sales = total variable costs.

c. total sales = total variable costs plus profit.

d. total sales = total costs.

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. If Community Pty Ltd sells 4000 chairs and 1000 tables, what is the sales mix?

a. 0.8 chairs, 0.2 tables

b. 0.4 chairs, 0.1 tables

c. 0.2 chairs, 0.8 tables

d. None of the options are correct

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Homemade Treats Pty Ltd desires an after-tax profit of $15 000. If the tax rate is 30%, what is the before-tax profit that must be earned by Homemade Treats Pty Ltd?

a. $21 429

b. $10 500

c. $4 500

d. $50 000

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. From the information in the table below, calculate the unit sales necessary to achieve the desired profit.

a. 15 000 units

b. 8750 units

c. 12 500 units

d. 18 750 units

Feedback: $70 000/(1 – 0.30) = pre-tax profit $100 000. $20 – $12 = CM $8/unit.

(50 000+100 000)/8 =18 750 units to cover the fixed costs plus the target profit.

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Bright Yellow Pty Ltd’s selling price per unit is $50, its variable costs per unit are $30 and its fixed costs for the year are $25 000. Calculate Bright Yellow Pty Ltd’s break-even point in dollars.

a. $41 667

b. $62 500

c. $1250

d. $83 333

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Which of the following statements regarding the margin of safety is not true?

a. The margin of safety is the mix between fixed and variable costs.

b. The margin of safety indicates how much revenue can decrease before reaching the break-even point.

c. A small margin of safety should motivate managers to reduce costs and increase sales to avoid potential losses.

d. The margin of safety in units is equal to the actual or estimated units of activity minus units at break-even point.

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. Which of the below statements about the contribution margin ratio is true?

a. The contribution margin ratio is total contribution margin divided by total sales and then multiplied by 100.

b. The contribution margin ratio is the contribution margin shown as a percentage of revenue.

c. The contribution margin ratio determines the sales dollars required to achieve a desired profit.

d. All of the options are true.

Learning objective 10.3 ~ Apply the contribution margin ratio to CVP calculations

1. Select the formula that can be used to determine the contribution margin ratio.

a. After-tax profit divided by (1 – tax rate)

b. Selling price per unit less variable costs per unit

c. Contribution margin per unit divided by selling price per unit

d. Fixed costs ($) divided by contribution margin per unit ($)

Learning objective 10.3 ~ Apply the contribution margin ratio to CVP calculations

1. Emphasis Pty Ltd makes luxury pens. If the selling price per pen is $100, the contribution margin ratio is 40% and total fixed costs are $25 000, how many pens must Emphasis Pty Ltd sell to achieve a desired profit of $20 000?

a. 200

b. 625

c. 1125

d. 500

Learning objective 10.3 ~ Apply the contribution margin ratio to CVP calculations

1. Which of the following statements is not an important assumption regarding CVP analysis?

a. Unit price and cost data vary over the time period

b. Fixed costs remain fixed

c. The sales mix for multiple products remains constant

d. Cost behaviour is linear

Learning objective 10.4 ~ Explain the key assumptions underlying CVP analysis

1. Which of the following statements is correct with regards to the underlying assumptions of CVP analysis?

a. A step up to the next relevant range of activity may incur an increase in fixed costs.

b. All costs can be classified as either fixed or variable.

c. The sales mix between multiple products is always the same.

d. All the statements are correct.

Learning objective 10.4 ~ Explain the key assumptions underlying CVP analysis

1. Which decision below could break-even data assist with?

a. Which resources do we need to focus on to increase our profit?

b. What is the impact on profit if there is an increase in fixed costs?

c. How many bikes need to be sold to achieve a before-tax profit of $12 000 for the year?

d. All of the options listed

Learning objective 10.5 ~ Discuss the uses of break-even data

1. If calculations show that the break-even point is too high for the period, which of these is not a possible course of action?

a. Consider the impact of increasing advertising costs to generate more sales.

b. Consider changing the sales mix.

c. Consider reducing prices.

d. Confirm that the cost forecasts used are reliable.

Learning objective 10.5 ~ Discuss the uses of break-even data

1. Operating leverage refers to:

a. the mix between sales and fixed costs.

b. the mix between fixed and variable costs.

c. the mix between sales and variable costs.

d. the relationship between product mix and costs.

Learning objective 10.6 ~ Outline the concept of operating leverage

1. An entity with a higher proportion of fixed costs to variable costs compared to an entity with a lower proportion of fixed to variable costs is regarded as:

a. having a lower operating leverage.

b. equal in risk.

c. riskier.

d. less risky.

Learning objective 10.6 ~ Outline the concept of operating leverage

1. If there are limited resources, the greatest profit can be earned by:

a. minimising production of the product with the highest contribution margin per unit of the limiting factor.

b. maximising production of the product with the lowest contribution margin per unit of the limiting factor.

c. maximising production of the product with the highest contribution margin per unit of the limiting factor.

d. none of the options are true.

Learning objective 10.7 ~ Assess the profitability of output when there are resource limitations

1. Which of the following is not a production or operational limitation for a manufacturing business?

a. Market demand

b. Equipment

c. Space

d. Labour

Learning objective 10.7 ~ Assess the profitability of output when there are resource limitations

1. From the information below, determine the contribution margin per unit of limiting factor (labour hours).

a. $3

b. $40

c. $10

d. $30

Learning objective 10.7 ~ Assess the profitability of output when there are resource limitations

1. Which of the following statements is correct when assessing profitability with resource limitations?

a. Most businesses are not limited by market demand.

b. The most profitable result will be to maximise production of the product with the highest contribution margin per unit of the limiting factor.

c. The most profitable result will be to minimise production of the product with the highest overall contribution margin.

d. Limiting factors only relate to labour hours.

Learning objective 10.7 ~ Assess the profitability of output when there are resource limitations

1. When considering whether or not to make or buy a product, an entity should identify which of the following?

a. Additional costs from making the product

b. Incremental income and incremental costs

c. Opportunity costs

d. All of these options should be identified in the decision-making process

Learning objective 10.8 ~ Assess relevant information for decision making

1. Which of the following statements about opportunity costs is true?

a. Opportunity costs are avoidable costs.

b. Opportunity costs are not relevant in decision making.

c. Opportunity costs are the costs of forgoing benefits that would be available if the resources had been used in the next best alternative.

d. All of the statements are true.

Learning objective 10.8 ~ Assess relevant information for decision making

a. choosing to buy all products to be sold.

b. making all products to be sold.

c. asking another entity to supply services.

d. deciding on whether to buy or make the products or services.

Learning objective 10.9 ~ Analyse an outsourcing decision

1. What are avoidable costs of outsourcing?

a. Costs required to pay the external provider

b. Those costs that will still be incurred by the outsourcing entity

c. Those costs that will no longer be incurred by the outsourcing entity

d. Fixed costs

Learning objective 10.9 ~ Analyse an outsourcing decision

1. Under what circumstance do opportunity costs need to be considered when making decisions about special orders?

a. If there is no idle capacity

b. If fixed costs remain constant

c. If irrelevant costs exist

d. If there is idle capacity

Learning objective 10.10 ~ Analyse a special order decision

1. Which factor below needs to be considered when deciding whether to accept a special order?

a. Whether there is available capacity

b. If there is a possibility of developing a long-term relationship with the customer

c. Reactions of existing customers who are paying a higher price for the product

d. All of the options should be considered

Learning objective 10.10 ~ Analyse a special order decision

1. A local manufacturer has been approached to supply a special order for 500 ceramic vases at a price of $20 per vase. The current cost of producing the vases is made up of direct materials of $10 per vase, direct labour costs of $8 per vase, direct overhead costs of $5 per vase plus fixed overhead costs of $5 each. The company has sufficient spare capacity to manufacture the order without affecting its normal production. Should they accept the order?

a. Yes.

b. No.

c. Yes, as long as there are no adverse long-term effects of accepting the order that outweigh the short-term benefits.

d. Yes, as long as the customer pays for the order in cash.

Feedback: The business will incur a loss of $4000 from the special order. Selling price of $20 per vase compared to total costs per vase $28. Incremental income is $20 x 500 = $10 000 compared to incremental costs of $28 x 500 = $14 000

Learning objective 10.10 ~ Analyse a special order decision

1. If an entity has sufficient spare capacity it is more likely to accept a special order because:

a. there is no opportunity cost to accepting the order.

b. any order that uses up spare capacity will be profitable.

c. management will not want to have their machinery and employees idle.

d. the entity can demand a higher selling price for the special order.

Learning objective 10.10 ~ Analyse a special order decision

1. Which factor below needs to be considered when deciding whether to undertake a special order at a reduced price?

a. Whether the order will make a contribution to fixed costs should be considered.

b. The opportunity cost of forgone regular sales should be considered.

c. The effect on existing customers should be considered.

d. All of the options should be considered.

Learning objective 10.10 ~ Analyse a special order decision

1. Super Small Pty Ltd is a manufacturer of children’s clothing and has been approached to supply a special order for 10 000 designer shirts at a price of $12 per shirt. The variable costs of producing a shirt are $8 per shirt. Super Small Pty Ltd has sufficient spare capacity to manufacture the order without affecting its normal production and the order is within the relevant range so there will be no impact on fixed costs. Should Super Small Pty Ltd accept the order?

a. Yes, as profits will be increased by $40 000.

b. Yes, as fixed costs will not change.

c. No, as the price being offered of $12 per shirt is not sufficiently above the full cost of production of $8 per shirt.

d. There is insufficient information to tell whether Super Small Pty Ltd should accept the order or not.

Learning objective 10.10 ~ Analyse a special order decision

1. Footballs Pty Ltd has been asked to fulfil a special order for 2000 footballs at a 20% discount on the current selling price. Footballs Pty Ltd are already at full production capacity and would have to forgo regular sales worth $50 000 if they accept this special order. If the net benefits of the special order total $20 000 should they accept the order?

a. Yes, the profits will increase by $20 000.

b. Yes, as long as there are no adverse long-term effects that outweigh the short-term benefits.

c. No, a loss of $30 000 will be generated from the special order.

d. No. Footballs Pty Ltd do not have the capacity to accept this special order.

Feedback: Benefit of special order $20 000 less Opportunity cost $50 000 = ($30 000) loss

Learning objective 10.10 ~ Analyse a special order decision

Fill in the blanks

1. Mixed costs possess both ________ and ________ characteristics.

a. fixed, variable

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. The range of activity over which costs are assumed to be valid is the _____________ range.

a. relevant

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. As production increases, fixed costs per unit will _____________ (increase/decrease).

a. decrease

Learning objective 10.1 ~ Define fixed, variable and mixed costs

1. The horizontal axis of a CVP graph represents the ____________________ level.

a. activity

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. The point where total sales revenue equals total costs is known as the _____________ point.

a. break-even

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. The break-even point will ___________________ (increase/decrease) if there is a decrease in total fixed costs.

a. decrease

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. The amount of revenue per unit remaining after deducting variable costs per unit is called the _____________ _____________.

a. contribution margin

Learning objective 10.2 ~ Prepare a break-even analysis for single-product and multi-product entities

1. If variable costs are 75% of sales and fixed costs are $500 000, the break-even sales revenue will be ____________________.

a. $2 000 000

Learning objective 10.3 ~ Apply the contribution margin ratio to CVP calculations

1. The contribution margin ratio can be used to perform CVP analysis in circumstances where there is insufficient data to calculate the number of units of a product required to reach the _______________point.

a. break-even

Learning objective 10.3 ~ Apply the contribution margin ratio to CVP calculations

1. An important assumption in CVP analysis is that all cost functions are assumed to be _______________.

a. linear

Learning objective 10.4 ~ Explain the key assumptions underlying CVP analysis

1. The mix between fixed and variable costs in the cost structure of an entity is known as operating _______________.

a. leverage

Learning objective 10.6 ~ Outline the concept of operating leverage

1. When production is affected by limited resources, the contribution margin per ________________ factor should be calculated to determine the most profitable mix of products/services.

a. limiting

Learning objective 10.7 ~ Assess the profitability of output when there are resource limitations

1. Buying in a product or service instead of producing it is known as _______________.

a. outsourcing

Learning objective 10.9 ~ Analyse an outsourcing decision

1. In make or outsource decisions the irrelevant costs are those that will be incurred regardless of the decision made. These are referred to as __________________ (avoidable/unavoidable) costs.

a. unavoidable

Learning objective 10.9 ~ Analyse an outsourcing decision

1. The amount of capacity an entity has available to increase its output is known as either ______________ or _____________ capacity.

a. available, idle

Learning objective 10.9 ~ Analyse an outsourcing decision